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The graph is correct - a collar just has a similar payoff profile as a bull spread. is it right? or am i missing something here? when your stock price is less than k1 then your PL would be K1 + premium paid/received for both call and put. If you're long the stock S and long OTM put with strike K1 and short OTM call with strike K2 as such k1 < k2. I can't understand when you say that the maximum loss would be : "Limited to the difference between the two strikes less the net premium paid or received less the loss on the stock leg".
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So, the purchase price of the stock minus the K1 (as you will exercise and sell the stock at that price) plus premium received (or less premium paid).įirst thanks for this very helpfull website. In your example above, if the stock is below K1 then your loss will any loss on the stock +/- the premium for the option legs. I've modified it so it is a little clearer. Yes, I see that the description above can be a bit confusing. Would you recommend a collar option strategy in this case? If possible, I want to make some profit but I must protect those $1,000,000. Suppose I had $1,000,000 and in 1 year I still want to have at least the same amount. If you want to buy stocks and are looking for downside protection then you could also look at a Protective Put.
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However, with a collar you will still have some downside risk to consider, which is the maximum loss on the trade if the market sells off. If you wanted to put on a collar you will need to buy some stock first and then also sell call options to offset the purchase of the puts. If you "must" protect the total $1,000,000 then best not to trade at all - leave the money in the bank and earn interest. I would have made a better trade had I found it earlier). Thanks for your responses (I just discovered your site today. Got a few of questions:Ģ) Can I mitigate the risk by buying the stock at say, $2.08?ģ) What strategy is it called without the stock?Ĥ) What strategy is it called if I buy the stock?ĥ) Is there a better way to have done this? I bought a Nov 2.5 Call and sold a Feb 5 put, both on BSDM (stock closed at 2.02 today). If you "sold" the stock you would be short a collar.Ĥ) Nothing if you bought, but if you sold the stock it would be a Short Collar.ĥ) You could look to buy the stock and the sell the call and buy the put for a Long Collar. But this is no more of risky position than holding the stock outright as your position resembles a synthetic long stock.Ģ) No, you will "add" to the risk if you "bought" the stock. My question is what can I do with these? Is there a strategy fit fot these kind of situations? Greetings!ġ) It is risky in the sense that you have no upside or downside protection. I have the understanding that OTCBB & pink sheets stocks don't trade options. I have millions of penny stocks in about 8 companies (OTCBB & pinksheets)I've been holding the stocks for over 7 years now and none of them have had impressive returns therefore wouldn't like to sell'em. My comment might be a little off the subject but I thought this might be the best place to ask.